Rithm Property Trust - Earnings Call - Q4 2024

Executive Summary

• Rithm Property Trust delivered GAAP net income of $2.9 million and $0.06 diluted EPS, its first positive quarterly result in three years; non-GAAP Earnings Available for Distribution (EAD) was $0.3 million ($0.01 per diluted share).
• Book value per common share was $5.44 (essentially flat vs Q3’s $5.47), and the company paid/declared a $0.06 common dividend for Q4.
• Management accelerated the pivot to commercial real estate, acquiring $154 million UPB of CMBS to bring CMBS UPB to $244 million; cash and equivalents ended Q4 at $64.3 million.
• Management plans to raise preferred equity in Q1 to bolster capital and fund growth; they target low double-digit returns on debt-focused CRE investments, with an active M&A lens as a growth lever.

What Went Well and What Went Wrong

What Went Well

• Returned to profitability: “GAAP net income attributable to common stockholders of $2.9 million, or $0.06 per diluted share” and positive EAD ($0.3 million; $0.01 per diluted share).
• Balance sheet repositioning and CRE pivot: Sold legacy residential assets and reinvested in higher-quality CRE; acquired $154 million UPB of CMBS in Q4 (total CMBS UPB now $244 million).
• Stable book value despite rate headwinds: CEO noted rates rose ~60 bps across the curve while book value held at $5.44; dividend maintained at $0.06 per share.

What Went Wrong

• Core earnings still modest: EAD only $0.3 million ($0.01/share), highlighting early-stage earnings power post-transition.
• Revenue and mark-to-market volatility persisted: Q3 “Total revenue/(loss), net” was negative, driven by MTM losses, illustrating ongoing earnings variability as the portfolio is repositioned.
• Need for capital to scale: Management emphasized preferred equity issuance to shore up capital and retire higher-cost notes, reflecting limited current scale and desire to improve ROE.

Transcript

Operator (participant)

Thank you for standing by. My name is Ian. I'll be your guest for the topic of the day. At this time, I'd like to welcome everyone to the Rithm Property Trust fourth quarter 2024 earnings call. All lines have been put on mute for excessive noise. At this speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this call, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. I would like to hand the call over to Emma Bolla, Associate General Counsel of Rithm Property Trust, Uvia aus.

Emma Bolla (Associate General Counsel)

Thank you and good morning, everyone. I'd like to thank you for joining us today for Rithm Property Trust fourth quarter 2024 earnings call. Joining me today are Michael Nierenberg, CEO of Rithm Capital and of Rithm Property Trust, and Mary Doyle, CFO of Rithm Property Trust. Throughout the call, we are going to reference the earnings supplement that was posted this morning to the Rithm Property Trust website at the investor.rithmpropertytrust.com. If you've not already done so, I encourage you to download the presentation now. I would like to point out that certain statements made today will be forward-looking statements. These statements, by their nature, are uncertain and may differ materially from actual results. I encourage you to review the disclaimers in our press release and the earnings supplement regarding forward-looking statements and to review the risk factors contained in our annual and quarterly reports filed with SEC.

In addition, we will be discussing some non-GAAP financial measures during today's call. Reconciliations of these measures to the most directly comparable GAAP measures can be found in our earnings supplement. With that, I will turn the call over to Michael.

Michael Nierenberg (CEO)

Thanks, Emma. Good morning, everyone, and thanks for joining us. I have some short comments, and then we'll go to the supplement, and then we'll do a little bit of Q&A. As we think about this vehicle, we took over what managed the contract of ultimately known as Great Ajax in June of 2024. For the first time in three years, we're happy to report the company had a positive economic result in Q4. While $0.06 a share is a start, we look forward to our ability to continue growing earnings and our capital base.

As we took over the company, the thought was, with the commercial real estate market extremely dislocated, we were going to turn this vehicle into getting out of the so-called legacy regime non-performing loan businesses that were out of that as a firm, but in this vehicle, turning it into an opportunistic vehicle focused on commercial real estate. So in doing that, we repositioned the balance sheet, we shored up all the financing around the assets, we sold down legacy residential positions, and we reinvested the proceeds into high-quality commercial real estate.

In doing all that, you can see the economic result, which for the quarter, again, we made $0.06 per diluted share from a GAAP perspective, and we're still maintaining the dividend at $0.06 with the belief that we're going to continue to grow out of this so-called hole that was part of this company for many, many years. How are we going to get there? How are we thinking about this vehicle on a go-forward basis? Because right now, it's got roughly $250 million, call it a back-of-the-envelope, that give or take 50% of book. So how are we going to get there? One is we're going to need more capital. So when we think about this stock price, we think the equity is extremely undervalued. So we'll likely be in the market in Q1 with a preferred equity deal.

This will do a couple of things. One is going to help us shore up our capital base. Two is it's going to give us more capital to invest, which therefore is going to hopefully create more earnings for our shareholders. We'll continue to sell down legacy assets. We don't meet our current thresholds, return thresholds. I will say the balance sheet is, for the most part, very, very clean. There's a bunch of retained interest that sit on the balance sheet that we can't sell that are part of older securitizations. Those will be there for quite some time. That's number one. Two, however, on that is the liability structure. They were issued with very low rates, so we feel good about that, and again, there's not much to do there.

And then finally, what we're going to do is we're going to seek M&A opportunities to truly grow the company. As you know, at Rithm Capital, the pipeline of M&A across the firm is extremely broad, and we are optimistic, and we do feel like we're going to be able to do something here. The playbook is very similar to New Residential. When we started that vehicle at Fortress, it was externally managed, and that was in 2013. We started roughly $1 billion of capital. Today, it has $7.8 billion. And along the way, we did a bunch of M&A, and we bought a bunch of assets. And I think we're going to be able to do something, hopefully. We'll be able to do the same thing here. So with that, I'm going to turn to the supplement. We'll begin on page three. I'm going to begin on page three.

Again, Rithm Property Trust was formerly known as Great Ajax. I gave you the comments that we set this thing up or repositioned the company to take advantage of what we think is one of the better investing opportunities we've seen in many, many years in the commercial real estate sector, as well as we'll look for other opportunistic ways to deploy capital. The pipeline today is roughly $1 billion of things we're looking at, and we all know not everything fits one box, fits in one box, so we're extremely selective. When we look at the amount of capital in commercial real estate right now, there's $50 million in commercial real estate that's going to continue to grow. When we look at the investments, we're targeting something in the low double digits.

When you look at the team and you think about the folks that work on this business, again, this vehicle's externally managed. There's not whether it's $200 million, quite frankly, or $20 billion. The amount of effort and the team is still the same. And we take great pride in trying to create value for shareholders. Page four, financial results, $6.9 million in GAAP income for the quarter, $0.06 per diluted share. EAD earnings are available for distribution. A penny, again, first positive result in three years while a penny is not much. We're optimistic on where we're going to go with this. I do think the same at $0.06 per common share. Cash and liquidity on balance sheet at the end of Q4 is $64 million. Total shareholder equity is $247 million. Looking at book value, $5.44, essentially unchanged from Q2.

One thing I want to point out there is rates. When you look at rates across the curve, they're up approximately 60 basis points. So if you think about the result, rates up 60 basis points, book value essentially unchanged. And a lot of that is, quite frankly, to the investing that we did in the quarter and then prior quarters where we put on floating rate assets at low double digit returns, and that enabled us to get to this positive result. If you look at page five, just a couple of points here. As I mentioned, we repositioned the balance sheet. What does that mean? We sold down a little under $340 million from a gross standpoint of legacy residential mortgage assets. We deployed, as I pointed out, $50 million into commercial real estate.

GAAP net income grew from a loss in Q2 of $15 million, a positive result of $2.9 million, and then earnings available for distribution grew from a loss of a little under $10 million to a little bit, so probably kind of flat, and then we also improved all of the financing arrangements we had in the company. As we look ahead, I think this is looking forward, commercial real estate debt. We're targeting what I would say low double digit returns. There'll be some opportunities to deploy capital at higher returns, but for now, that's how we're thinking about it. There's no legacy issues that we see right now that are going to cause any problems for the company. Thinking about the commercial real estate sector, anybody that's been investing in office over the past number of years is going to have many issues.

Right now, where we stand, we feel very, very comfortable with the opportunity ahead of us. Page seven, this talks about opportunities and yields. Again, we're going to target something in the low double digits. We'll look for some opportunistic situations where we're going to be able to deploy capital at higher returns as well. So really, to summarize for me, and then we'll turn it over to Q&A. One is we're on the right path. Team is working hard. We are going to need more capital. The capital we're going to try to do is raise money in the preferred market in Q1. And then from there, we'll continue to deploy capital. We'll hunt for some M&A opportunities. And again, the playbook is very similar to what we did when at Fortress, where we had started with a billion of capital in new residential.

I think that's where it has a little bit under eight billion today. So with that, I'm going to turn it back to the operator, and then we can have some Q&A.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, please press star one. Our first question comes from the line of Tom Catherwood with BTIG. Your line is open.

Thomas Catherwood (Managing Director)

Good morning, everybody. Michael, first off, congratulations on your position at Fortress. It's great to see that. And I appreciate your comments as far as the opportunities and the strategy for growth going forward. But as someone with a foothold at RPT for eight-plus months, how has your view on commercial real estate evolved? And are the opportunities that you're pursuing the same as they initially were, or have they shifted over time?

Michael Nierenberg (CEO)

Good question, Tom. Here's what I would say. There's been all this talk about opportunities in commercial real estate. Quite frankly, if you roll back the clock to Rithm, we have deployed hundreds of millions of dollars into different commercial real estate opportunities. While saying that, we're not saying there are no opportunities to do so. We've seen a lot of office over the course of the past year, year and a half. Not everything works, quite frankly. We are starting to see more opportunities. We're seeing, for example, working with some of the large money center banks where we could provide a B-note or mezz-note on some underlying loan that they're making, which helps from a capital standpoint at the bank. And for us, it creates that double-digit yield that we're targeting.

The net of it is, quite frankly, that we think on a go-forward basis, you're going to see more opportunities. There's plenty of capital out there chasing. I think the key for us is when you look at Rithm as an organization between Sculptor, which does their own thing, has raised a lot of money around the real estate funds and has a great track record. We're at the Rithm level where we've deployed capital. And now, in this vehicle where we repositioned, we see everything. But again, not everything fits. We're looking for debt. We're going to look for some more opportunistic situations, and it's going to continue to come our way. So we don't need to be office everything. We have the expertise here to do that.

But it's going to be more around the loan side, I think, and working with some of the larger banks and some distressed opportunities.

Thomas Catherwood (Managing Director)

I appreciate this thought. That's kind of where I wanted to go next was, were you still surprised for that we saw a slower pace of loan sales out of banks and could that accelerate in 2025?

Michael Nierenberg (CEO)

I do think it will accelerate in 2025. When you think about, and I worked at a large bank for five years. When you think about the banks, unless you're forced to take that mark, typically you're going to hold on to that asset. As you see banks taking more marks, and obviously the banking sector's had a great, great run. You look at bank earnings. It's fantastic. I think you'll see them right now more of their kind of problem real estate. The other thing what you're going to see is our belief is that rates are going to stay higher for longer. Everybody was betting on, for example, the 10-year. I pointed out, rates are up 60 basis points. So if you look, I think 10s went from 4 to roughly 4.6 today.

and I think at the end of the year, you're up 60, now you're up even a little bit more. When you look at, the general belief was that rates are going to come back down because the Fed is cutting rates. You had the Fed meeting yesterday, and the Fed's basically saying, "We're on hold for now because the economy is strong." Rates are not going to come down that quick. And as a result, I think you're going to see more problems in commercial real estate as things reset higher. And debt service becomes a problem. so I think you'll see more assets come out.

Thomas Catherwood (Managing Director)

Appreciate your comment on that. And then last one from me. From the preferred, maybe two questions. First, do you have a magnitude in mind at this point? And the second one is, would this be growth capital, or would some of it be used to address the higher coupon unsecured notes to have on balance sheet?

Michael Nierenberg (CEO)

It's going to be a combination of both. It's a good question. I mean, ideally, if there was a transaction that was highly accretive, we're going to continue to try to do those. Where the stock's trading, I didn't just warn you, roughly $2.85 or something like that, and book value of, call it, $5.50. We prefer not to issue stock down here if we don't have to. That's why tapping into the preferred market, even if it's higher coupon. I will point out that if you go back in time, there's covenants around the unsecured, and there is a need to buffer the capital base around some of that unsecured as you think about covenants. Now, with capital, we have cash and liquidity on balance sheet, but the net of it is we want to do both.

One, take care of some of the high-yield notes. Two, it's more capital to deploy so that you grow earnings.

Thomas Catherwood (Managing Director)

Understood. Appreciate your comments, Michael. Thank you.

Michael Nierenberg (CEO)

Thank you.

Operator (participant)

Question comes from the line of Jason Stewart with Janney on the line.

Jason Stewart (Analyst)

Hey, Michael. Good morning. When you think about the strategy evolving and you're moving maybe some top of the capital structure down to the middle part of the capital structure on the asset side, have you thought about how the financing needs to evolve and where that would meet your needs in terms of hitting ROE and the term financing of those assets?

Michael Nierenberg (CEO)

The answer is yes. When we do something, if we're going to partner with, call it, one of our large money center banks, typically we'll try to do something in conjunction with financing unless the returns where we can justify an unlevered return without putting any leverage on that asset. There's plenty of financing available to us at the Rithm Property Trust level. Keep in mind, Jason, as a firm, at the Rithm level, the balance sheet from mortgage company and everything else, the balance sheet's $40 billion. So when you think about the power of Rithm supporting, being that this vehicle is externally managed and there's a Rithm employee, the power of our franchise, I think, is pretty broad. We have a lot of access to financing. So we're not going to do something unless it meets, obviously, the return hurdles. So the short answer is, going back, yes.

But there's plenty of financing available, whether that be in the term financing on an asset or some straight financing with an insurance company and/or other ways to finance our business.

Jason Stewart (Analyst)

Okay. I'm looking at price target. And I'm just thinking about ROE on a go-forward basis. And if you move from senior down to the mezz to just top line gross ROEs to cover preferred and spreads tighten and to get more opportunistic, where the sweet spot in the capital structure on the asset side would be in conjunction with financing, how far down you're thinking about going in the future on the asset side of the capital structure?

Michael Nierenberg (CEO)

We're not going to set up this vehicle to be a so-called first loss vehicle just to seek yield. I'll be really clear about that. There's a ton of lending demand where it could be transitional lending. It could be just a ton of demand for lending. And when you look, even in our Genesis business, that's a wholly owned sub of Rithm. We have business on residential transitional loans. Did almost $4 billion of production last year. You look at the underlying unlevered return, and it's anywhere from, give or take, 10%-11%. So we're going to see plenty of opportunity. We're not going to be, again, the first loss piece provider on different deals just to do something to seek yield. We want to make sure one is we're first and foremost, credit first in underwriting, and then we're going to solve for return.

We're confident we'll get there. We did a loan out of Rithm going back in 2024 at SOFR plus 700 on a development project with Kushner. That was, if you think about it, it's a 12+% unlevered return. There could be plenty of opportunity.

Jason Stewart (Analyst)

Got it. Okay. That's really helpful. And then just going back real quick to the office market, I mean, it does seem like on the margin, the conversation has shifted a little bit more positively. Do you think that unlocks more opportunity, or how do you think about this conversation evolving, I guess, and the opportunities in office?

Michael Nierenberg (CEO)

Hey, there. We've seen a lot of office. I mean, if you look at the pipeline, even from some of the larger brokers, there's a ton of office. There was a building that traded, I think, today, my old Fortress downtown grounds, 1345, that traded to Blackstone. I mean, there's a ton of things that we see in office. One of the things that if we're going to be in office and you're, for example, if you're going to be on the equity side of site, the net equity investment in Rithm Property Trust has to be a multiple. We have to get a multiple of what we think that the building is worth if we're going to go in on that. While saying that again, we prefer to be in debt rather than equity because we think it's a better place to be right now.

It's somewhere we can put money out. There's tons and tons of office that continue to come out. A lot of it's bad, quite frankly. And when I say bad, it's like, I don't know, a lot of it just has to be repurposed. So we've got to be really, really selective. And again, there's a ton of need for capital. If you think people are going to go back into the office, there's a ton of need for money for CapEx in a lot of these buildings because everybody wants to be in a new building. But we see plenty. A lot of it doesn't work.

Jason Stewart (Analyst)

Got it. Okay. Thanks for the call. Appreciate it.

Michael Nierenberg (CEO)

Thanks, Jason.

Operator (participant)

Question comes from the line of Stephen Laws with Raymond James. The line is open.

Stephen Laws (Analyst)

Hi. Good morning, Michael. I saw the $28 million of equity capital is allocated in the real assets, about 20%. Can you talk about the ramp and on the current equity base, how high this can get or maybe asked another way, how much equity supports some of that investments in legacy assets that are going to stay on the balance sheet?

Michael Nierenberg (CEO)

It's a good question, Stephen. So let me address the second part. It's everything we do, not everything, but I think everything we do on a go-forward basis is going to be around commercial real estate. So for example, if we hit the market with let's just use round numbers, and I'm hopeful we can do this. If we hit the market with $200 million of preferred equity over the course of the year, would we do it in one swoop or not? I don't know. We'd prefer to do it now. Let's just call it roughly 50% of that. If we wanted to retire the outstanding debt, we could do that. Then you'd have another $100 million of equity going into commercial real estate.

When you look at the money that we've deployed in commercial real estate so far, it's roughly we've added about $270 million from a gross standpoint. Again, most, if not all, it's floating rate. And when you think about the advance rates on this stuff and where we are, advance rates could be anywhere from, call it, 80%-85% in that range as we think about the non-mark-to-market or facilities. The rest of the stuff, quite frankly, you have a bunch of stuff that's consolidated on balance sheet. I think you put out earlier in my opening remarks, you just can't sell it because it's legacy residential RMBS. So if you think about $250 million of kind of equity capital and looking at our position sheet and the balance sheets are really good, not that much left to sell down, it's going to release a ton of equity.

The rest of it's really going to be in residential real estate right now.

Stephen Laws (Analyst)

Appreciate the comments there. And just based on the investments, I guess, can you update us on any investment activity in the month of January? And then the bigger picture, as you look at your current pipeline, can you talk about the relative attractiveness of additional CMBS investments versus the senior and mezz loan opportunities you're seeing in your pipeline?

Michael Nierenberg (CEO)

We're looking at both. We look at every deal that comes out. We see every deal. It's going to be a combination is what I would say. Same comment going back to Jason's question. We're not going to be. I've been doing this a long time. Credit matters first. Underwriting matters first, particularly in commercial real estate. You want to make sure that you're crossing your Ts and dotting your I's. So it's going to be a combination of, call it, bonds as well as putting money out. I also think, and I pointed out M&A, we at Rithm, we see a ton of M&A. We look at hundreds of deals a year. If you look at our track record around the stuff that we've done, it's been pretty impressive, quite frankly.

That doesn't mean last year we came up with a management contract of this, and we did another mortgage company deal. So it's not like we're going to do a ton, but the opportunities, I think, on the M&A side to, one, grow the capital base, and then, two, put out capital that's going to be more accretive than just, for example, buying a AAA CMBS bond.

Stephen Laws (Analyst)

Right, and then lastly, over the course of the year, I know most of the securities on the balance sheet is available for sale. I mean, are those investments you think eventually you rotate out of into CRE whole loans, or do you think these are longer-term holds and just part of the longer-term targeted asset mix as you put together this portfolio?

Michael Nierenberg (CEO)

When I look at forward-levered yields on the remaining portfolio where we currently sit, our forward returns are on average, what I would say, anywhere from 12%-18%. So there's really no rush to sell them unless you have the ability to reallocate that capital into something that's more accretive. We spend a lot of time between on the resi side of our residential teams, our commercial teams, we spend a lot of time looking at all kinds of different assets. What I pointed out is, look at the book value at $5.50, stocks at $2.80, and we think the equities are cheap. But we've got to have a reason to actually just sell something. We don't give anything away. That's not who we are.

But we need to make sure that we look at the opportunity on the other side of something that we're going to sell, is what I would say.

Stephen Laws (Analyst)

Great. So any investment activity in January you can care about today, or?

Michael Nierenberg (CEO)

Yeah. Just a little bit more in the top part of the capital stack around some of the newer CMBS deals. A ton of capital out. I looked at it earlier. I think we're sitting on, give or take, $65 million of cash and liquidity. We want to raise a bunch here in the first quarter to bolster the balance sheet, have a hard look at some of the debt, and then get ready to deploy more capital. And then if there's something highly accretive, we'll come back to the marketplace and figure out a way to take our track record has been doing this stuff and take this company from where it has $250 million of, call it, equity value to something that's multiple billions. So I think that's extremely relevant.

Stephen Laws (Analyst)

Yep. Fantastic. Appreciate the comments this morning, Michael. Thank you.

Michael Nierenberg (CEO)

Thanks, Stephen.

Operator (participant)

Harter is on the line at the end of the quarter with UBS. Your line is open.

Douglas Harter (Analyst)

Thanks. Hey, Michael. The relative attractiveness of using SOFR or leverage of a note versus kind of financing through warehouse lines and offer a better return opportunities today?

Michael Nierenberg (CEO)

Again, going back to my earlier comments, we're going to look at everything. There's going to be a combination of both. When you think about D-notes and you think about issuing loans, obviously, you've got to prioritize first. Structural leverage, when you hit the securitization markets, that is attractive. While saying that, the balance sheet that we have here is small. The equity capital base is small, and until we get to real scale, there's nothing that we're going to issue in the, call it, the securitization markets because we're not underwriting or creating conduit loans per se. We'll be working more with partners on the origination stuff. I think you can see, you may even see at some point where we partner with some of the other businesses that we have here at Rithm on some opportunities in commercial real estate.

We have a lot of capability between some of our wholly owned subs on the Rithm balance sheet. The same team, again, we're internally managed. So the Rithm employees, the same guys and gals that work on Rithm Property Trust that work on Rithm. Obviously, Rithm has plenty of capital. So you're going to see situations, I think, where we as a firm no different than I think Blackstone does on some of their stuff. So we as a firm are going to partner with some of our other subs and operating companies.

Douglas Harter (Analyst)

Appreciate it. Thank you, Michael.

Michael Nierenberg (CEO)

Thanks, Doug.

Operator (participant)

There are no further questions at this time. I'd like to hand things back over to Michael Nierenberg for some closing remarks.

Michael Nierenberg (CEO)

Thanks. Appreciate you guys joining the call and asking the questions. It's helpful to all of us here at Rithm Property Trust and Rithm Capital. What I would say, again, just to close in my closing remarks, the vehicle will be a lot more active, we hope, over the course as we go forward. Our ability and track record to create value for shareholders, I think, is you don't have to look further to some of the other things that we as a group have done. The same group that's created Rithm Capital. We're the same group that are working on Rithm Property Trust plus some of our other opcos. And we're excited about where we think we can take the company. We'll be in the capital markets, hopefully, here in the near future. And stay tuned.

The desire to grow earnings and make this thing great and grow the share price is something that's extremely important to us. We look forward to participating soon. Have a great day.